Exhibit 12.8 Use the Information Below for the Following Problem(S)

question 38

Multiple Choice

Exhibit 12.8
Use the Information Below for the Following Problem(S)
As an economist for a research firm you are forecasting the market P/E ratio using the dividend discount model. Because the economy has been slow for 5 years, you expect the dividend-payout ratio to be 55%. Long-term government bond rates are at 6% and the equity risk premium is estimated to be 3%. Return on equity (ROE) is estimated to be 11%.
-Refer to Exhibit 12.8.What is your expectation of the market P/E ratio?

• A) 9.17
• B) 11.11
• C) 13.58
• D) 18.33
• E) 21.42

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